David Hadley, a Republican challenging Democratic Assemblyman Al Muratsuchi in the race for California’s 66th Assembly District, has returned $40,900 that he inappropriately funneled to his campaign, the state’s political watchdog announced Wednesday.

“The case remains open for potential penalties and further investigation,” Gary Winuk, chief of enforcement for the Fair Political Practices Commission, wrote in an email to The Bee.

The announcement came a day after Muratsuchi’s campaign filed a complaint with the FPPC saying that Hadley had laundered money to his campaign account through a series of straw committees in an attempt to skirt contribution limits. Under California law, only political parties can give legislative candidates more than $4,100 per election.

The Democrats’ complaint said that Hadley formed a fundraising committee called the “Republican Party of Los Angeles County – 66th district,” which was not actually a Republican Party committee and was registered to Hadley’s home address. It said he then raised money into the account – much of it from people who had already given him the maximum allowable donations – and after a series of transfers, moved $45,000 to his campaign account.

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The FPPC looked into the complaint and directed Hadley to return the bulk of the money – all but $4,100. Because the committee he created at his home address is not a political party committee, “it could not contribute more than $4,100 to David Hadley for Assembly 2014,” says a letter the FPPC wrote to Hadley’s campaign treasurer.

Hadley, an investment banker who lives in Manhattan Beach, and his treasurer wrote a letter to the FPPC saying they would return the money “out of an abundance of caution.”

The letter says they sought advice in response to the complaint, and learned that the committee “may not be a party committee under state law, and if it is not it would be subject to applicable contribution limits.”

“Any implication that the (committee) is a sham or a ‘money laundering’ scheme is simply false and totally unsupported by the facts,” Hadley’s letter said.

In an interview, Hadley said the committee had been raising money long before he decided to run for the Assembly. Muratsuchi, he added, has had his own run-ins with the FPPC. The commission fined Muratsuchi $800 in July for failing to file several online reports during his 2012 campaign.

The dust-up comes as Republicans are working to keep Democrats from re-gaining the legislative supermajorities they won in 2012. Muratsuchi’s seat is among a handful of contests in close districts where Republicans are trying to oust Democratic incumbents. The FPPC’s work on the Hadley case marks the first time the watchdog has used a new power to investigate candidates in the run-up to an election, said Winuk, the FPPC enforcement chief. That power was granted by Assembly Bill 800, which was signed into law in April.

Editor’s note: This post was updated at 6:40 p.m. Oct. 22 to include comment from Hadley. This post was corrected on Oct. 23 to say that Muratsuchi’s campaign filed the complaint with the FPPC.